Division 7A (part 1): taking money or assets from your company

A private company is a separate legal entity. Its profits are taxed at the company rate — lower than most individuals' marginal rates — on the understanding that, when those profits are paid out to shareholders, they are taxed again in the shareholder's hands (usually as a franked dividend). Division 7A stops shareholders from side-stepping that second layer of tax by quietly drawing on company money instead of declaring a dividend.

Division 7A can apply where a private company, in an income year, provides a benefit to a shareholder or their associate in one of three ways:

Where a company has lent money to a shareholder or associate, you can keep it out of Division 7A by acting before the earlier of the company's tax-return due date and the date it is actually lodged (the lodgment day). You have two choices.

Option 1 — Repay it in full

Repay the whole amount to the company before the lodgment day. A genuine repayment removes the loan from Division 7A entirely. (You cannot, however, repay the loan and then re-borrow a similar amount as part of an arrangement — the ATO looks through that.)

Option 2 — Put it on a complying loan

Document the loan on complying terms and make the required repayments each year. A complying loan agreement must:

Once on complying terms, the borrower must make a minimum yearly repayment (MYR) every income year, and the company includes the interest it earns in its tax return. You cannot borrow from the same company to fund the minimum repayment.

Estimate the minimum yearly repayment on a complying Division 7A loan and see how the balance falls over the term. The benchmark interest rate changes each year — enter the current rate for an indicative figure.

This calculator is a simplified illustration only. The actual minimum yearly repayment uses the loan's opening balance and the benchmark rate set for that year, and the figure changes if the rate or balance changes. We confirm the exact amount for your loan.

Division 7A is only triggered when value leaves the company informally. There are several proper channels for paying yourself — each with its own reporting:

Salary, wages & directors' fees

If you work in the business, the company can pay you a salary, wage or director's fee and generally claim a deduction — provided it registers for PAYG withholding, withholds tax, reports through Single Touch Payroll, and meets its super guarantee obligations. You declare the income in your individual return.

Dividends

The company can distribute profits as a dividend, usually carrying a franking credit for tax the company has already paid. It issues a distribution statement to each shareholder; you report the dividend and the franking credit in your return. The company cannot deduct dividends — they are a distribution of profit, not an expense.

Trust distributions to a company

Where a company is a beneficiary of a trust but the trust does not actually pay the entitlement across — an unpaid present entitlement — Division 7A (and related ATO guidance) can treat it much like a loan back to the trust. These arrangements need careful handling each year.

We review your shareholder loan accounts before lodgment, calculate the exact minimum yearly repayment, prepare complying loan agreements, complete the Division 7A labels in the company return, and set up clean processes so private and company money stay separate — keeping you well clear of a deemed dividend.

Download the ATO flyer (PDF)

Talk to us Read the ATO's Division 7A guidance

Division 7A

Rules in the tax law that treat certain loans, payments and forgiven debts by a private company to shareholders or their associates as assessable unfranked dividends.

Associate

A person or entity closely connected to a shareholder — for example a spouse, relative, a related trust or company.

Deemed dividend

An amount treated as a dividend by Division 7A. It is unfranked, so it is taxed in the shareholder's hands with no franking credit, and is capped at the company's distributable surplus.

Lodgment day

The earlier of the day the company's tax return is due and the day it is actually lodged — the deadline for repaying or documenting a loan to avoid Division 7A.

Complying loan

A loan placed under a written agreement that meets the Division 7A requirements: minimum benchmark interest rate and a maximum term of 7 years (or 25 if secured).

Benchmark interest rate

The minimum interest rate a complying Division 7A loan must charge. The ATO sets it for each income year.

Minimum yearly repayment

The least a borrower must repay each year on a complying loan so that it stays outside Division 7A. It cannot be funded by further borrowing from the same company.

Franking credit

A credit attached to a dividend for company tax already paid, which a shareholder can use to offset their own tax. Deemed dividends carry no franking credit.

UPE

Unpaid present entitlement — an amount a trust has made a beneficiary entitled to but has not yet paid. Where the beneficiary is a company, it can attract Division 7A treatment.

PAYG withholding

Pay as you go withholding — tax an employer holds back from salary, wages and directors' fees and pays to the ATO.